Page 497 - DCAC Feb 2026 Files

3. Public Corporate Credit: Fueling Business Growth
Companies issue public corporate credit. This sector helps fuel business growth and
investment spending. While this segment of the market can be more volatile than
government or municipal debt, it remains a crucial financing tool for corporations.
• Investment Grade Bonds ($9.4 trillion outstanding, $1.3 trillion annual
issuance): Bonds with a rating of BBB or higher are considered “investment
grade”. BBB issuances make up over 50% of the investment grace corporate
credit market.

• High Yield Bonds ($2.0 trillion outstanding, $233 billion annual issuance):
Bonds with a rating of BB or lower are considered “high yield” or “below
investment grade.” BB issuances account for nearly 50% of the high yield
corporate credit market.

• Syndicated Loans ($1.8 trillion outstanding, $580 billion annual issuance):
Syndicated loans are loans made by a collection of lenders to a single
borrower. These types of loans are often levered and floating rate.
Source: Canterbury Consulting Valuation: Valuing corporate credits typically require using option-adjusted
To fully understand U.S. fixed income markets, we need to look outside the Agg. spreads (OAS) and discounted cash flows.
The Anatomy of the U.S. Fixed Income Market 4. Structured Credit: The Securitization Engine
1. U.S. Federal Government Debt: The Risk-Free Foundation Structured credit relies on a process known as securitization, in which non-tradable
assets, such as individual mortgages, auto debt, or student loans, are repackaged to
U.S. Federal Government Debt sets the foundation for fixed income markets create a tradable asset whose returns depend on the cash flows of the underlying
globally. The market is comprised of public Treasuries, agency debt, and loans. This segment of the fixed income market plays a crucial role in providing
intergovernmental holdings.
liquidity and allowing investors to access differentiated sources of return.
• Public Treasuries ($30 trillion outstanding, $22.5 trillion annual issuance): • Agency Residential Mortgage-Backed Securities (RMBS) ($9.2 trillion
The Public Treasury market is the most liquid fixed income market worldwide, outstanding, $1.8 trillion annual issuance): Agency RMBS are guaranteed
with daily trading volumes often exceeding $1 trillion. The 10-year Treasury by Ginnie Mae, Fannie Mae, or Freddie Mac and are backed by a pool
note sets the tone for pricing across financial markets, as it is often used as of residential mortgages guaranteed by these agencies. They are often
a proxy for the “risk-free rate.” Foreign holders account for about 25% of considered to be backed by the full faith and credit of the U.S. government,
issuance outstanding, and the Fed accounts for about 22%.
making them less risky.
• Agency Debt ($2 trillion outstanding, $1.25 trillion annual issuance): Agency • Non-Agency RMBS ($1.85 trillion outstanding, $135 billion annual issuance):
debt is issued by governmental agencies, such as Fannie Mae, Freddie Mac, and Non-agency RMBS are backed by privately issued residential mortgages but
Farm Credit. Agency debt is considered nearly risk-free.
not backed by a U.S. Government agency. They are typically considered riskier
• Intergovernmental Holdings ($7 trillion): Intergovernmental holdings than Agency RMBS.
are non-tradable, for example, Social Security trusts. This sector is largely • Asset-Backed Securities (ABS) – Consumer Debt ($2.8 trillion outstanding,
irrelevant for investors.
$345 billion annual issuance): Asset-backed securities are backed by a variety
Valuation: Valuation of the U.S. Federal Government Debt is fairly straightforward of loan types. These can include auto debt, credit card debt, or student loan debt.
and takes into account yield curve dynamics and auction (issuance) results.
• Collateralized Loan Obligations (CLOs) ($1.15 trillion outstanding, $237
2. Municipal Credit: Funding America’s Infrastructure billion annual issuance): CLOs, also known as bank loans or leveraged loans,
Municipal credit, also known as “munis,” are issued by state and local governments. are pools of bank loans. These loans typically hold first-lien positions in the
Default rates are low in this asset class, often below 0.1%. Additionally, munis company’s capital structure.
offer federal and sometimes state tax exemptions, which makes them particularly • Commercial Mortgage-Backed Securities (CMBS) ($1.44 trillion outstanding,
valuable for taxable investors. This segment of the fixed income market finances $180 billion annual issuance): CMBSs are backed by pools of commercial
schools, roads, and utilities. mortgages. These mortgages often finance large properties such as malls,
• Investment Grade ($4.1 trillion outstanding, $450 billion annual issuance): office buildings, or large multi-family developments.
Investment-grade munis are primarily AAA-rated. At first glance, yields may Valuation: Valuations for structured credit rely on OAS, prepay models, and
appear low for this asset class. However, on a tax-adjust basis, muni yields can tranche-specific risks.
offer investors strong returns.
5. Direct Lending: The Private Credit Surge
• High Yield ($200 billion outstanding, $30 billion issuance): High yield munis Direct lending has grown in popularity over the past decade, as post-Great Financial
can include issuances such as tobacco bonds, Puerto Rico restructurings, and Crisis regulations made it more difficult for traditional banks to lend to corporate
hospital debt.
entities. Lenders in this space often negotiate directly with companies. The
Valuation: Valuation of municipal credit focuses on muni-to-Treasury ratios, after- majority of issuances are floating rate. This segment of the fixed income market is
tax yields, and call features. generally very illiquid.

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